Retail Roundup: Secondhand Is the New Black

By

Teresa Rivas

May 1, 2018 3:42 p.m. ET

Text Size

Regular

Medium

Large

By

Teresa Rivas

May 1, 2018 3:42 p.m. ET

To say that it's been difficult to invest in retail in recent years is an understatement, but there are still opportunities for savvy investors. "You have to have a niche, and you have to be different," says John Fox, chief investment officer at Fenimore Asset Management.

To that end, Fox only invests in retailers that he sees as occupying a distinct area of the industry--while also sporting strong balance sheets, good returns on capital, and good valuations that allow him to buy and hold stocks for the long term.

Illustration:
iStockphoto

For example, Ross Stores (ROST) has been one of his holdings since 2001, but it's still a name he likes today. Fox says that the central story remains a compelling one--brand-name goods for 30% to 60% of the standard retail prices--and that its (largely female) shoppers have built in frequent trips to Ross stores to their regular routines, to scope out new arrivals and get the thrill of discovery. With an average ticket price of less than $10, the business is hard for online competition to replicate, given shipping costs, and Ross and its peers have seen little pain from the massive growth in e-commerce that has plagued other stores. "We talk to [commercial] landlords, and these are the that tenants they want."

Autos are another area. Here he recommends AutoZone (AZO): Slightly cheaper than peer O'Reilly Automotive (ORLY), which Centerstone Investorsrecommended last week, it benefits from the same dynamics, i.e. the fact that mechanics (and customers) want cars fixed as quickly as possible, demanding parts within minutes or hours, not overnight or two-day shipping. While same-store sales have suffered across the industry, Fox says it's still a high-margin business, with the potential for international growth expansion, and AutoZone throws off a lot of free cash, with the flexibility to reduce its share count. He also likes CarMax (KMX), which has done a good job at countering all the unpleasant aspects of car dealerships (a lack of transparency, haggling). "CarMax is transparent and [offers] a very user friendly experience," he says. Every car is on their website and available for purchase without negotiation, while on the other end, car owners can bring in their car and walk out with a check 20 minutes later, instead of dealing with trade-in offers. "CarMax has a very good brand name, that stands for honesty and transparency," and he sees a long runway for growth, as it builds out from its 200-store base.

Dollar General (DG) is another of his holdings, and its a chain that's done very well in rural areas where there aren't many alternatives. In towns were Walmart (WMT) may be 20 miles away (and large and difficult to navigate to boot), plenty of consumers prefer to do quick trips in Dollar General, which is price competitive with Walmart but much more convenient. The fact that it's adding some 900 new stores this year alone speaks to the retailer's success.

His final suggestion is Winmark (WINA), which owns a number of chains selling secondhand goods, from Play It Again Sports to Plato's Closet. Fox likes that it's a capital-light business, as its a franchise model, and that it taps into a growing trend of consumers buying used merchandise--more on that below.

Earnings Reports

Illustration:
Bloomberg News

Under Armour (UAA) broke even in the first quarter on $1.19 billion in revenue. Analysts are parsing the quarter this morning. Instinet's Simeon Siegel reiterated a Reduce rating on the stock, although he writes that with Under Armour beating lowered expectations, investors can at least look forward to the rest of the year "with hope." That said, he's still concerned about the company's revenue opportunity, and the shares still look expensive.

Needham's Rick Patel writes that bulls will likely focus on the better-than-expected sales, which could be seen as progress on its turnaround, as North American revenue seemed to stabilize, while bears will point to ongoing high inventories. Moreover, the company didn't update its guidance, despite the better-than-expected results--which could either be conservative or indicative of challenges ahead. He has a Hold rating on the shares.

Susquehanna's Sam Poser reiterated a Negative rating on Under Armour, writing that inventory levels continue to "appear out of control," as highlighted by the increase in receivables, which seems to indicate large shipments at the end of the quarter. He writes that that combination--high receivables and inventory--looks "like a ticking time bomb."

MKM Partners' Roxanne Meyer writes that Tapestry's fiscal-third-quarter beat was largely due to lower taxes and interest expense, as gross margins came up short. She writes that Stuart Weitzman was the main drag, cutting three cents per share in earnings from the results. That said, she writes that Coach and Kate Spade are doing well, and she called today's weakness a buying opportunity for a "powerful growth story."

Other News

As our discussion above about Winmark touched on, these days, apparel retail is more than just the mall--consumers can shop online of course, but there are also specialty services from StitchFix, which sends tailored pieces to your door, rent designer duds from Rent the Runway, or score them cheaply on The RealReal.

Illustration:
iStockphoto

To that last point, Cowen & Co.'s Oliver Chen recently hosted a call with James Reinhart, the CEO and co-founder of thredUP, a digital platform for the resale of secondhand clothes. Reinhart's data shows that resale of clothing is growing 24 times faster than the regular apparel category, and that one in three women shopped secondhand last year--that's 44 million consumers, up from 35 million in 2016. It's also popular with younger shoppers, not surprisingly, with 40% of millennials shopping for used items. And, it's not just for thrift store and flea market devotees: 70% of thredUP's consumers had never thrifted before. Reinhart believes that over the next decade, retail disruptors will account for a third of the average consumer's closet, with resale becoming bigger than fast fashion, thanks to millennials' desire to minimize their environmental impact (while still quickly refreshing their wardrobes).

Chen and Reinhart discussed how thredUP and others are taking the treasure-hunt model that has worked so well for TJX (TJX), Ross and other discounters and taking it to the next level: ThredUP adds as many as 1,000 new items an hour, which makes it compelling for consumers to return frequently and scroll through the latest arrivals whenever they have a free moment on their phones. The curation of the goods--all from well established brands--also sets it apart from Amazon.com (AMZN), whose apparel runs across the spectrum in terms of quality.

And for millennials that are brand-conscious, but still remember the pain of the recession (and may still be feeling the effects, thanks to lower salaries), digital platforms that offer resale items are a good compromise, with the ease of shopping online and bargains of a thrift store. Reinhart estimates that thredUP customers have saved $1.1 billion off retail prices in the past five years.

*

In recent years, data points have shown that the consumer has been gaining strength, but that didn't translate to better performance for restaurants and retailers. Yet, now we're seeing "synchronized improvement in sales trends for both groups," notes John Zolidis of Quo Vadis Capital, even as other headwinds haven't faded, leading him to believe that "the consumer has gotten stronger, creating a rising tide environment."

Illustration:
Pixabay

Retail had a great holiday season to cap off 2017, erasing some of that year's earlier losses, and restaurants also began to show strength around the same time. Zolidis writes that wage growth and employment gains are behind the results, which, along with lower personal-tax withholdings are offsetting e-commerce disruption and overcapacity and competition for the two groups.

Zolidis writes that it may be a "head fake," and retail and restaurants may see traffic slump again. "However, we've resisted recognizing several data points of improvement already and the duration of the gains together with its breath has us convinced something more meaningful has occurred." In retail his pick is Sprouts Farmers Markets (SFM) and Texas Roadhouse (TXRH) for restaurants.

*

Jefferies' Randal Konik takes a look at pricing trends for apparel retailers in recent months, writing that Urban Outfitter's (URBN) Anthropologie brand and Chico's FAS (CHS) were the only two major apparel players to show improvement in average selling prices and discounting in the 13 weeks ended April 10.

That said, it doesn't look like Chico's could hold onto that momentum, with prices coming down to start last month, he writes. By contrast, Gap's (GPS) Old Navy brand showed a slight uptick in discounting during the period, but Konik was sanguine, writing that the retailer continues to show positive average-selling-price growth and that promotions slowed in April. "Old Navy continues to be a driver of GPS performance, and it will account for more than 80% of the company's profits soon," he notes. In addition, Konik writes that Abercrombie & Fitch (ANF), which showed weak pricing and promotion trends in February, appeared to make progress on both fronts in March and April. Does that mean Abercrombie's comeback could be for real?

Telsey Advisory's Dana Telsey writes that the decision is a net positive for the stock, which comes on the heels of its decision to partner with Shop Runner, as well as experiment with sales on cruise ships and in airports--which, as we noted, could be a bright spot for retail. She writes that the company enjoys strong brand loyalty, which should have "significant overlap" with Amazon Prime customers, and the deal provides "a low-cost means of acquiring new customers as well."

Instinet's Siegel writes that the move is notable, as Chico's is one of the few "vertically integrated specialty retailers to sell through Amazon, gaining Prime eligibility and control of marketing, pricing, and promotions."

Sign up to Review & Preview, a new daily email from Barron’s. Every evening we’ll review the news that moved markets during the day and look ahead to what it means for your portfolio in the morning.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.